The article captures the impact of Union Budget 2016 on IT and ITES sector.
If the budget can be summed up in a few words, my view on the same would be “Progressive, rational and committed”. The FM seems to have done a good job of reiterating the Government’s commitment to the stated objectives of a non-adversarial and stable tax regime. One can see that various steps have been proposed in moving India “towards a lower tax regime with non-litigious approach”, e.g., introduction of lower tax rates for new manufacturing companies / low turnover companies, rationalisation of the penalty provisions, settlement schemes to clear off the wanted litigation backlog, one time disclosure scheme to disclose undeclared income, provisions casting greater onus on the Revenue to give effect to appellate orders, rationalisation of Rule 8D provisions, to name a few.
Further, FM has reassured India Inc that going forward, there will be no further retrospective tax amendments. In fact, a High Level Committee consisting of the Revenue Secretary (Chairperson), Chairman, CBDT and an external expert will be constituted to allay fears of any tax adventurism by the ground level tax officers in applying the existing retrospective amendments relating to indirect transfers.
As a reciprocal gesture from the other side of the table, the FM expects greater compliance and co-operation which is evident in his remark “while compliant taxpayers can expect a supportive interface with the department, tax evasion will be countered strongly”. The FM expects to come down heavily on tax evaders by use of technology. He intends to use technology to make life simpler for law abiding citizens on one hand and also for data mining to track tax evaders on the other. With the overall theme of the budget being thus set as promoting compliance, reducing litigation and pinning down evaders, the following key proposals would impact the IT/ITeS sector directly:
There were some jitters in the industry when the Government had proposed phasing out of tax incentives for a unit located in the Special Economic Zone from March 2017. Budget 2016 has eased the nervousness to an extent, by stating that the benefit would continue to be available for units set up before April 1, 2020.
Budget 2016 proposes to introduce the new Special Patent regime for royalty income from worldwide exploitation of patents (developed and registered in India). Such income is proposed to be taxed at a concessional rate of 10% on gross basis. This, coupled with the retention of incentives for research and development (albeit in a reduced form), is expected to encourage indigenous research activities and location in India of high-value associated jobs.
In keeping with its promise of promoting Make in India and Start-up India, the Government has prescribed a tax break for three on five years for eligible start-ups incorporated between April 2016 and March 2019. This is expected to provide a boost to the innumerable technology start-ups which the country is witnessing today. Applicability of MAT to start-ups, however, could prove a dampener to a certain extent. Further, reduced corporate tax rate of 29% is expected to benefit smaller tech companies (turnover less than INR 5 crores).
E-commerce companies have been brought under the net of a new equalization levy of 6% proposed to be introduced (in a B2B scenario) on payments made to non-resident entities (not having a PE in India) for online advertisement services, advertisement space, or any other facility or service for the purpose of online advertisement. The scope of the equalisation levy is expected to be widened eventually for any additional services as may be notified.
The move to clarify non-applicability of MAT to foreign companies in specified situations (DTAA partner with no PE in India or non-DTAA partner not requiring any corporate registration in India) is a move much applauded.
Finance Act 2013 had introduced special provisions relating to tax on distributed income of domestic company for buyback of shares by proposing a tax levy on the unlisted company @ 20%. Realising that there existed some avenues for tax planning in the way the provisions were currently worded, especially in corporate re-organisation scenarios, the FM proposes to introduce certain provisions to include all types of buyback (as provided under the corporate law) under the net of the buyback tax levy. Further, in respect of the shares being bought back, the manner of determination of computing distributed income would be prescribed.
Taking forward its commitment towards the OECD BEPS project, the Government has introduced the country by country reporting and master file reporting under Action Plan 13 (which is the minimum standard to be followed by the member countries). The said reportings are applicable from financial year 2016-17 to international groups having turnover greater than Euro 750 million.
The POEM provisions are here to stay but the applicability has been deferred by one year i.e. provisions to be now applicable from Financial Year 2016-17 as against 2015-16. The FM has reaffirmed his commitment to bring in the GAAR provisions as scheduled ie Financial Year 2017-18.
The availability of weighted deduction for employment of new employees has now been extended even to the service sector, subject to prescribed conditions.
A number of provisions have been proposed to be introduced to ease the overall tax administration and reduce litigation. Further, the FM has also indicated that a majority of the recommendations as proposed by the Tax Simplification Committee headed by Justice Easwer will be accepted. All in all, the FM seems to have maintained a fine balance between aggression on compliance and doling out of incentives as required to currently boost the Indian economy further.
Author is Tax Partner, EY India
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First Published on Mar 2, 2016 01:33 pm